Papale on the VIX

Nice Watch

Ok the obvious thing I will write about today, is ah…the Olympics.  Here a few tidbits you may not have heard. Anyone notice the sand at the beach volleyball does not stick to the players?  They can sweat and roll in the stuff and they come with hardly a grain on them.  Well, as  it turns out it is a special concoction that contains no gravel or shells.  That’s the stuff they say that sticks to skin.  Who da thought?   What about Jamaican sprinter Yohan Blake wearing a $500K watch during the 100 meter final?  Good thing he didn’t slip and fall.

Just a couple things today.  First, there is a lot being written lately about selling puts against cash as an options strategy.  As I have written about in the past, it is effectively the same strategy as putting on a covered call.  In most cases, selling the put is easier if for no other reason than it is one transaction vs. two for the covered call.  When markets move up, if it is the desire of the put seller to simply to collect cash, it can work out nicely.

However, when markets sell off there is the possibility of taking delivery of the underlying if it drops below the strike price.  So to restate the obvious – make sure you are happy owning the underlying if you employ this strategy.  Otherwise have clear plan in place to buy back the put if the underlying starts to fall.

Second, VIX is low.  It has been around 16 or so for the last week or so.  But we can still place and be successful with short vega trades in this environment.  Two comments on VIX.  First, it can stay low for a while or fall even further from here.  No one  knows.  You can look out at the VIX futures but that is just market expectation right now.  And our trades are short term, a week to several weeks.  Second, VIX typically drops when markets rally.  We have had some big rallies lately which pushes VIX and implied volatility down.  While this is good for our short vega, we can still pushed around on our delta with these large moves, forcing adjustments.  Stay disciplined.

Steve Papale is a mentor with DiscoverOptions, the educational arm of OptionVue Systems.  Inquiries should call 847-816-6610 or email

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